Chapter 3 - Issues raised
Views of economists
The committee heard evidence from a number of economists who suggested
that there were several options available to the federal government for funding
the rebuilding process.
Whilst the right of the government of the day to determine the fiscal measures
necessary to fund its obligations was acknowledged,
the economists offered two alternatives to the flood levy:
to reduce federal government expenditure, and
to borrow the funds and thereby temporarily increase the budget deficit.
The government has sourced funds for a part of the rebuilding package by
deferring some infrastructure projects and making some budget cuts to deliver
two-thirds of the $5.6 billion needed to rebuild flood affected regions.
As part of the package, the government will delay infrastructure
projects equating to $1 billion in order to free up funds and skilled workers
at a time of skilled labour shortages across Australia.
The need to get Queensland back on its feet is an immediate
pressure for both the infrastructure budget and labour force capacity. It is
also an important part of the Australian economy. However the Government’s
commitment to the projects that are re-prioritised is clear: we will deliver
all projects. Their construction has been deferred and once the reconstruction
work is undertaken, those projects that have been rephased will recommence
In addition to the delay of infrastructure projects, the government will
make $2.8 billion in spending cuts including:
Not proceeding with the Cleaner Car Rebate Scheme
- Abolishing the Green Car Innovation Fund
Reducing and deferring spending on the Carbon Capture and Storage
Flagships and the Global Carbon Capture and Storage Institute
- Abolishing the Capital Development Pool from 1 January 2012
- Discontinuing funding for the Australian Learning and Teaching
- Redirecting funds from the Priority Regional Infrastructure
Program and Building Better Regional Cities Program
- Capping annual claims under the Liquefied Petroleum Gas (LPG)
- Capping funding for the Renewable Energy Bonus Scheme – Solar Hot
- Not proceeding with Round 2 of the Green Start Program
- Capping funding for the Solar Homes and Communities Plan
- Withdraw funding to the O-Bahn City Access project.
Professor Anthony Makin, of the Griffith Business School asserted that additional
areas of public expenditure cuts could easily be identified in the 2011-12
federal budget which has projected outlays of $364.6 billion in 2011-12.
Professor Makin suggested that, in his opinion, this would be the optimal
Cutting public expenditure, particularly on industry
assistance, is in turn preferable to allowing the budget to slip further into
In a broader context, the whole economy should be taken into
account with due regard to certain principles of macropolicy making. I would
argue that one of those principles is to identify unproductive areas of
spending across the economy and to make decisions to weed them out for the
benefit of the economy in the longer term. There will be short-term costs, but
to the extent that public consumption is cut it will add to saving in the
economy and Australia is still relatively short on saving... Really, when
looking at cutting spending across the board, there needs to be a
whole-of-government review to identify those programs that are not delivering.
Mr Saul Eslake of the Grattan Institute agreed that further reductions
could have been identified:
In my view, there certainly would have been scope for further
reductions in government spending. Most of the reductions in government
spending which the government announced fell into one of two categories. The
first category was reductions which they had to make because there would not have
been sufficient skilled labour to undertake both the rebuilding and
reconstruction of infrastructure effort that is likely to be required and other
infrastructure projects according to their original timetables in Queensland
and in other parts of the country.
The committee however did explore the risks associated with extensive
cuts in public expenditure, some economists suggesting that such a response
would reduce economic activity, which after a natural disaster inherently
places added strain on the economy.
Professor Warwick McKibbin, who appeared before the House Economics Committee, outlined
the affects of various responses to reduced economic activity following a
natural disaster or a temporary economic shock:
A natural disaster reduces economic activity when it occurs.
Financing reconstruction requires immediate delivery of reconstruction effort
and therefore an immediate funding response. There are at least three main ways
to finance rebuilding. The first is to raise taxes, which further reduces
private demand and therefore reduces economic activity even further. The second
is to cut government spending, which also reduces economic activity even
The third is to increase the fiscal deficit temporarily—and I
stress ‘temporarily’—to borrow to refinance the rebuilding... Both cutting
spending and raising taxes worsens the decline in economic activity in the
The Australian Council of Trade Unions (ACTU) supports the levy, and
sees it as a 'far better alternative to deep and far-reaching spending cuts.'
We believe it would be detrimental to Australia’s long-term
prosperity for the extra costs of the floods to result in a substantial
re-prioritising of important Government spending initiatives including
investment in infrastructure, or cutbacks to recurrent expenditures on health,
education and other services.
Professor McKibbin outlined that one of the goals of economic policy is
to smooth national consumption over time. He suggested the most effective means
to do this is through an immediate funding response for the reconstruction
effort through borrowing, and a temporary increase in the fiscal deficit:
The advantage of borrowing is that this does not directly
reduce economic activity today, but spreads the cost of rebuilding over many
decades into the future. The macroeconomic goal should be to reduce the
negative effects of the disaster soon after it occurs. Only borrowing achieves
Dr Richard Denniss of the Australia Institute agreed with Professor
What you want to do after a shock like that is to inject some
money into the economy sooner rather than later and if you have a short-term
interest in maintaining your budget position, you are going to make some
A household analogy would be to imagine if it were your own
house that had just been flooded and you were trying to get yourself back on
your feet in the month after the flood. Would you be spending money on new
carpet and buying some new appliances and improving your amenity as quickly as
you could and would you perhaps be borrowing to do that? Or would you be
cancelling your kids’ swimming lessons and basically reducing the services that
you are providing to your family, saying ‘We’ve got to balance the budget in
the next month’? Or would you take those costs and spread them out over a
longer period of time? I think borrowing makes enormous sense.
Mr Eslake further detailed the minimal impact that borrowing would have
on the current economy:
...by allowing the deficit for the financial years between
now and 2011-12 inclusive to be higher, the surplus for 2012-13 to be lower
than presently forecast or indeed the year in which the budget returns to
surplus to be pushed out a bit further. I say that because the numbers entailed
here, the $5.6 billion, represent a very small proportion of GDP, about 0.4 per
cent of one year’s GDP. Bear in mind that we are talking about a sum being
spent not in one fiscal year but rather spread over two or three fiscal years.
As a proportion of any one year’s GDP, the additional borrowing that might be
entailed if the government chose to fund all of it through borrowing would be
about 0.2 per cent of GDP as a maximum
As it happens, the pattern of expenditure and hence borrowing
that might have been required had the government chosen to go down the path of
funding it all by borrowings would not have had any material impact either on
the profile of the budget or on the way in which the financial markets or the
Reserve Bank would have responded to it.
While the ACTU notes that a greater fiscal deficit was certainly an
option for the government, it acknowledges the government's commitment to
obtain a budget surplus in 2012-13:
Australians understand that a modest deficit is an entirely
reasonable way of funding nation-building infrastructure. However, the ACTU
also accepts that the government has made a commitment to a fiscal strategy
that will see the Federal Budget record a surplus in 2012-13.
Why a levy?
Australia will be undertaking an unprecedented rebuilding programme after
a summer of natural disasters. Rebuilding flood‐affected
regions across Australia is going to be an immense national challenge with the Commonwealth’s
costs expected to be in the vicinity of $5.6 billion. The levy is estimated to
raise $1.8 billion towards these costs.
Mr Hoffman—...With that comes an enormous cost to the
public purse and also to individuals and companies. The challenge that we all
face is that there needs to be a rebuilding...
CHAIR—Thank you, Mr Hoffman. Yes, indeed, it seems
like a very big challenge at the moment. We have been saying this morning that,
clearly, it is in not only the personal interests of Queenslanders but the
overall economic interests of getting Queensland going again that it is
appropriate for all Australians to contribute, because of the economic
importance of Queensland in the scheme of things.
Mr Hoffman—That is so true. Given the scale of it, the
impacts on the agricultural sector are immense. With the loss of economic
production that is directly caused as a result of the floods and cyclones and
the resultant damage to assets, investment in the assets to enable materials
and suppliers to go into those affected areas to effect the repairs and then to
enable them to get back on their feet and operating is paramount. The situation
is confronted in the mining sector, where large areas of mines in Central
Queensland and, to a lesser extent, in the Surat Basin are still not fully
operational and will not be for some time whilst it continues to rain and they
are unable to clear the water and restart production. So investment by the
private sector as well as the public sector to ensure that we are back on track
economically as well as socially and environmentally is fundamental to the
state and the nation’s wellbeing.
The Government's response
On 27 January 2011, in an address to the National Press Club, Prime
Minister Gillard announced a suite of measures that would be implemented to
help Australia rebuild after the summer of natural disasters.
In that address, the Prime Minister detailed that the package announced
was developed in the context of the country's current economic outlook as well
as the Government's long-term reform agenda and commitment to bring the budget
back to surplus in 2012-13:
Simply spending to rebuild without addressing the balance
between supply and demand in the economy as a whole is not an option. That
would only drive up the cost of skilled labour and the cost of building
materials and other economic inputs, reduce value for money...rob our mining
industry and other economic sectors of the skills and material they need, and
ultimately spill over into higher inflation and interest rates.
As a result of the current economic environment, the rebuilding process
will place added demand on the economy. The Prime Minister's rebuilding package
is designed to reduce the demand on the economy during the rebuilding phase.
It does this through the introduction of a one-off flood levy, the deferral of
some infrastructure projects and by cutting some spending programs. In total
these measures amount to the required $5.6 billion required for rebuilding.
As identified by the Prime Minister, given Australia's current financial
and economic context; an economy with close to full employment and skills
shortages; there is a need to offset the additional demand that will be put
into the economy through the required rebuilding program with the demand that
already exists. A levy seeks to achieve this balance.
Although alternative approaches such as funding the reconstruction
effort by solely borrowing or cutting public expenditure were explored, the
government decided a levy would most effectively achieve the balance required.
Mr Eslake acknowledges the government's right to make this decision, and
concurs that the choice made will not be detrimental to the economy:
I do not start from a position that temporary or permanent
levies on income tax are, prima facie, wrong. They are a legitimate policy
instrument. I mentioned there and I do again that I have some sympathy with
proposals that have been made elsewhere for a Medicare style levy to fund a
national disability insurance scheme, for example. In the context of the matter
that you have before you here today I said, and I still believe, that the
income tax levy proposed by the government was one of three options that could
have been considered, with neither of the other two being in any way
economically irresponsible, either more so or less so, than the particular proposal
which the government has put before you for consideration today.
Moreover, whilst Dr Dennis did not believe there was a macroeconomic
imperative to respond to the funding for reconstruction with a flood levy he
...if the government does want to raise additional revenue
then I think the flood levy is an efficient and an equitable way to do it.
The committee considers that the introduction of a one-off levy is an
equitable and reasonable response for the Government to have taken to fund the
reconstruction effort that will be required as a result of the summer of
The committee takes this view in the light of evidence it has received
that suggests that the amount of levy any one taxpayer will pay is slight and in
the average case will have the equivalent weekly cost of a cup of coffee from a
The committee also considers that the Government has taken all
reasonable steps available to it to ensure that the levy does not have a
negative effect on those more vulnerable taxpayers by:
- limiting it to those taxpayers with taxable income greater than
$50,000 who were not affected by the recent natural disasters; and
- making it progressive, ensuring that those taxpayers who are
better off will pay a little more.
The Committee recommends that the Senate pass the bills.
Committee comment – Economic response for future natural disasters
In light of the many natural disasters that have occurred in a
relatively short space of time in both Australia and the Asia-Pacific region
the committee believes it would be prudent to examine the adequacy of its
preparedness for future reconstruction efforts following a natural disaster,
and its impact on the economy.
The committee acknowledges the many valid points presented by the
economists to both the House and Senate inquiries, and can see merit in further
examination of a more consistent national approach to natural disasters. The
Senate Economics References Committee is currently examining these matters and
also issues relating to State Government insurance. The committee looks forward
to its report.
Senator Annette Hurley
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